Sunday, October 31, 2010

I wrote yesterday that I expect higher than average voter turnout in the U.S. elections that take place on Tuesday. There are also forces working against voter turnout, particularly that of time pressure.

Traditionally, college students are under the most intense time pressure, but that pattern is changing as people take on more and more interest and activities in their personal lives. The most common pattern is that people accumulate more things to do over time, but this then reaches a peak around the age of 60, after which people start to take on a degree of self-restraint when it comes to their schedules. Of course, part-time workers and retirees may have much less time pressure than full-time workers.

This profile of time pressure corresponds in a very rough way to demographic voting patterns. College-age voters vote in notoriously small numbers, while retirees are the most reliable voters.

If there is a long-term trend in time pressure affecting voter turnout, though, I am unable to find it in the data. It may be that election day comes infrequently enough to be exempt from time pressure calculations in people’s minds.

In this year’s election, the large number of unemployed and underemployed workers — about 15 percent of eligible voters — could correspond to an increase in voter participation, if time pressure is a factor. If employed workers turn out less than unemployed workers, this could indicate a time pressure effect. I would be surprised, though, if this effect is large enough to measure.

Saturday, October 30, 2010

Voter turnout is likely to be higher than usual in this year’s U.S. elections, which take place Tuesday, November 2, not just because of the high interest in the political issues at stake, but also because fewer voters are moving.

It’s true that home foreclosures are the highest they have ever been in U.S. history, and foreclosure usually means it’s time to move (though foreclosures also occur on houses where the owners have already moved out). What is even more extraordinary, though, is the way that foreclosures have become one of the main reasons people are moving from one residence to another. Roughly half of homeowners are stuck with their homes, unable to move because the amount they owe on their mortgages is at least as much as the homes could be sold for. They may want to move, but it will have to wait.

Another reason people are not moving as much as usual is the low turnover in the job market. People move mainly to go to new jobs. With few job openings, there aren’t so many reasons to move.

People are less likely to vote while they are in the middle of moving, or for several months afterward. They are more likely to vote if they are staying put. With more people than usual staying where they are, voter turnout is likely to be higher for that reason alone.

Friday, October 29, 2010

I don’t always have time on a Friday night to explain the events and problems of the banking industry in the detail that they call for. If you don’t have years of history inside banking and haven’t been following the story all along, it can get confusing. Accordingly, I am grateful to Peter White at Truthout for putting together a report that explains, more clearly than I ever could, the connection between foreclosure error and the financial condition of banks. For a quick background on this, please read:

No longer able to lean on stock market gains, the giant banks are having to look farther afield to report profits. In some cases they are slashing their loan loss provisions. This results in a profit on paper but is not the same as making a profit from operations. If the bank executives can smile and say, “We don’t think there are more loan losses ahead,” Wall Street might buy it for this quarter, but what will the banks do for the fourth quarter? The reduced loan loss provisions, just at the time when the largest commercial real estate loan losses are about to come tumbling in, is a desperate move from banks that don’t know which way to turn. Surely some investor-class lawsuits will follow from the date of the third-quarter earnings report for bank stocks that tumble from their current levels, though the chance of these lawsuits recovering any money from a bank in a downward spiral are slim. (I have not looked at specifics and do not mean this as a comment on any specific bank holding company).

AIG pulled off a miracle in its stock offering for AIA, which was its oldest and largest operating company. It raised $18 billion, a higher amount than AIA is worth in total, while selling only 58 percent of the company and holding on to a 42 percent stake for itself. This was the largest Hong Kong initial public offering ever. AIA stock began trading today (as 1299.HK). The cash from the stock offering should allow the remnants of AIG to hang on well into next year.

There were no early bank failures reported tonight. It may be that regulators are holding off in order to avoid putting bank failures into the political spotlight on the busiest campaign weekend of the year. If you are a U.S. registered voter, please vote on Tuesday, November 2.

Thursday, October 28, 2010

The flurry of activity that surrounds a major election is something economists have been observing and writing about for many years. The election spending, particularly in the three weeks leading up to election day, tends to give the economy a small boost. The boost this time, though, could be larger because of the Supreme Court ruling earlier this year that allows unlimited and anonymous corporate election spending.

Political spending on this election is considerably more than we have ever seen in the past. The total spending officially will surely be less than $10 billion, a lot for an election but a drop in the bucket in the U.S. economy. When the unreported spending is included, though, the total could be comparable to the size of the stimulus package of 2008.

Most of the political spending comes from corporations that are otherwise mostly holding on to their cash. Some of the spending, to be sure, is coming out of the public relations or advertising budget. But much of it is money that would not otherwise be spent. An action that converts saving to spending is a more pure form of stimulus than one in which spending is converted from one form to another.

Despite the consistent denials of the political operatives involved, it seems a safe guess that a lot of this year’s political spending is coming from outside the country. Imagine, billions of dollars pouring into the United States from other countries. This is, in some ways, the best form of stimulus — there is nothing to be paid back later. In other ways, of course, it is the worst form of stimulus — stopping to think of the implication that the country is for sale.

Political spending goes largely to broadcasters, newspapers, and the post office — sectors currently in desperate need of funds. In all three areas, this fall, it is safe to say that the influx of political money will prevent or defer layoffs that otherwise would happen immediately.

So the stimulus that comes from all this extra election spending will be good for the U.S. economy, right? Well, yes and no. Any stimulus is good for the economy if it’s your job that’s saved, but the political spending stimulus has the drawbacks that come with political policy being engineered for the benefit of international corporations rather than the people of the country. And beyond this, it has the same drawbacks that any stimulus would have in the current recession: it diverts resources from the growth areas of the economy to the declining sectors. This eases some of the short-term economic pain, as the businesses that benefit can postpone their decline for a short time, but is basically no help at all in terms of what the economy will look like five or ten years from now.

Wednesday, October 27, 2010

You think you know, but like so many other things in agriculture, the reality doesn’t live up to the story you usually hear. Dogs are, for the most part, born into unbelievable poverty and squalor, are killed by the millions at an early age if they have the wrong stripes or get minor illnesses, and if they live long enough to get into the stores, they are at risk of catching illnesses and dying there.

Dog breeding, it turns out, is a cut-throat business, literally, where killing second-rate puppies is an everyday task, but where even that degree of ruthlessness doesn’t guarantee a profit.

One of the saving graces of the recession is that puppy sales have plummeted, and with a smaller market to sell into, breeders are breeding and killing far fewer puppies.

But it is not just that people are buying fewer dogs. The popular support for dog breeding is starting to fade. Evidence of this is a ballot measure, expected to pass in Missouri next week, that would limit dog breeders to 50 breeding (adult) dogs. This comes close to shutting down the state’s breeding industry, as a typical dog breeding operation may have more than a thousand dogs and still barely get by financially. With a limit of 50 dogs, dog breeding effectively becomes a part-time job.

Meanwhile, the city council in Richmond, British Columbia, is considering a measure to ban the sale of puppies in pet stores. The bylaw is expected to pass unanimously when it comes up for a final vote. The city of 175,000 is struggling with the cost of about 500 dogs a year abandoned by city residents, and thinks the puppy ban will reduce its stray-dog costs. At the same time, council members believe instituting the ban means it’s doing its part to address the dog breeding problem. At a recent meeting, one pet store owner showed up to speak against the proposal. But another pet store in town has already stopped selling puppies, as demand for them evaporated in the economic slowdown.

Opponents of measures such as these like to talk about the difference between “legitimate breeders” and “puppy mills,” but people in the dog business have assured me there really is no such distinction. Every breeder will tell you that they are legitimate and it’s the other breeders who are operating puppy mills. Some breeding operations may be cleaner than others, but no for-profit breeder could possibly provide a pet-quality lifestyle for its dogs, and national breeding organizations virtually require breeders, “legitimate” or not, to kill non-conforming puppies.

Ultimately, pet stores don’t actually need the dog breeders. That’s because more than enough puppies are born into dog-owning households to provide a dog for everyone who wants to have one. These household puppies get better care and tend to be healthier and better adjusted than the puppies from breeders. A small number of pet shops have stopped buying dogs from breeders and instead are offering dogs that come from animal shelters in the local community. This is the story, for example, of Pet Rush, a Los Angeles-area pet store that made the switch in June. The store owner says that obtaining dogs from local shelters has made things simpler not just for himself, but also for his customers.

It costs animal shelters a fortune to take care of stray and unwanted dogs. The new OK Go video, “White Knuckles,” which is serving as a fundraiser for ASPCA animal shelters, could also work as an advertisement for rescue dogs. The dogs are actually the more lively performers in the video, and as the band notes, “Most of the dogs in the White Knuckles video are rescues.”

Tuesday, October 26, 2010

One of the reasons the housing crash was so abrupt was that so many houses, perhaps as many as 5 percent nationwide, were owned by investors. Some bought houses with large mortgages, hoping to “flip” them — to enhance their value in small ways, then sell them quickly. Others owned five to ten houses that they didn’t really live in, hoping to take gains on the appreciation of the property as real estate values crept up over the years. This formed a shadow inventory of houses, not officially counted as being available before the peak, but suddenly dumped on the market as soon as it became clear that housing values were no longer heading up. The influx of this shadow inventory forced a rapid downward adjustment in prices.

There are plenty of stories to indicate that this is happening again — that private investors and hedge funds are betting that the bottom is near in the housing market, and are buying up foreclosed and otherwise distressed properties, especially houses, with the idea of selling them in two or three years. The investors are hoping that the housing market will be operating in a more orderly fashion by then, so that the properties purchased now at distressed prices can be resold at higher prices.

As before, this bit of speculation may not work. The traditional housing market indicators, such as inventory levels, point to a further decline in the coming years. In addition to the active inventory, there is an enormous shadow inventory of houses whose owners want to sell now, but will not be able to sell until they pay down the mortgage further (or prices go up). This shadow inventory is probably between 1 in 7 and 1 in 4 houses, but whatever its actual size, it is much larger than the active inventory of houses, and puts downward pressure on prices. Specifically, any increase in prices will put many houses on the market all at once, and if prices hold steady, these houses will come onto the market gradually as owners’ financial positions improve.

Then there is the shadow inventory of the houses owned by investors. This speculative inventory may again be dumped on the market, potentially millions of houses in a matter of weeks, if a further downward trend in real estate values is seen, adding to that decline. This is always the risk when speculators support a perceived bottom in any market. If the speculators have set their support level too high, prices that seemed to have bottomed may suddenly fall further.

Perversely, then, a recovery in real estate values could lead directly into a new crash. If prices were to go up by 5 percent nationally, that would enable millions of previously stuck homeowners to sell. If the influx of this shadow inventory happened quickly, it could send prices right back down again, and if the downward movement prompted some speculators to cash out, the result could be a new downward spiral.

The more favorable scenario for the economy (though not so favorable for speculators) is that real estate prices continue to edge lower for the foreseeable future until the economy works through the shadow inventory of housing and reduces the official inventory to a more sustainable level. If the housing market can be kept relatively stable, that will provide a higher bottom for real estate than what we are likely to see if there is further governmental or speculative intervention.

Monday, October 25, 2010

Cotton is the most expensive it has ever been, at least since it was introduced as a crop in the United States. The high prices can be blamed on, at least, current messy weather in the United States and cold weather in China and previous wet weather and floods limiting crops in Pakistan and India. Demand for cotton is also higher than ever because of population growth and technological advances that make cotton textiles more versatile. U.S. prices for cotton are also lifted by a declining U.S. dollar, which makes it easier for more of the U.S. crop to be exported.

The world is adjusting by changing the trade routes for cotton. In particular, China is importing more right now. Meanwhile, India, which had cut off exports after its crop damage, has started exporting again.

Another adjustment is a renewed emphasis on cotton recycling. At this point, the effort consists mostly of collecting worn-out denim for use in manufacturing cotton insulation. Some businesses, though, say they have worked out the technology for extracting clothing-quality fibers from T-shirts and other common cotton items. If true, this could greatly expand the industrial footprint for recycled cotton, a welcome development in any case, but all the more so at a time when the world is having trouble growing all the cotton that people want.

Sunday, October 24, 2010

There is another side to the story of employers who say they can’t find qualified workers. As Laura Bassett at Huffington Post pointed out, many employers apply completely arbitrary rules to eliminate candidates, including the highly illogical but nevertheless rather common requirement that job applicants must be currently employed. Relatively few employers advertise the fact that they automatically reject unemployed applicants, but on any given day, there are at least a million job openings where unemployed workers will be eliminated on the initial screening of applicants. There are always employers who refuse to consider candidates who aren’t currently working in the field, but this has especially high impact on the job market now, which has:

Unnaturally low turnover, as workers who have jobs stay in them longer than usual, and those who do not may be unemployed for a very long time.

More unemployed workers than ever.

Economic uncertainty that may make workers reluctant leave a job to take a job at a company that has any questions at all about its future — which, these days, is more companies than not.

A large number of employed workers who cannot easily move to take a new job for reasons related to the real estate market: an underwater home mortgage, uncertainty about qualifying for a new mortgage, or difficulty in selling their current house.

In this context, any arbitrary rules or barriers that employers put in place add friction to an already choppy job market. Most of these employers will eventually hire the people they are imagining, but this could take a year or two longer than necessary, resulting in lost production and income — a loss to the economy at large.

Saturday, October 23, 2010

Prior to this year, no one had sailed around the Arctic Ocean in a single summer season. This year, two expeditions did so, and the receding ice near the Arctic coast made it look easy.

The Northern Passage, a trimaran carrying explorer Børge Ousland, captain Thorleif Thorleifsson, and various crew members along the way, set out from Oslo, Norway, four months ago at the beginning of summer and arrived back at its starting point today.

A Russian expedition on the yacht Peter I following the same course paused at Iceland for repairs and to wait out difficult weather, but may also be arriving home, at St. Petersburg, this weekend.

A number of cargo ships also crossed the Arctic Ocean this summer, making it the first season for routine cargo traffic crossing the Arctic between the Pacific and the Atlantic.

In its assessment of the summer melt season in the Arctic, NOAA concludes that the new pattern of summer melt, which started in 2007, is permanent. It also says the resulting increased volatility of Arctic weather is affecting weather patterns in temperate climates. NOAA also said the trend toward thinner ice cover can be expected to continue.

Friday, October 22, 2010

Most of the banking industry is completely unprepared for what is about to hit it.

I came to this conclusion yesterday after poring over surveys of bank executives and banking customers.

Banking customers, as you would guess, say that banks don’t understand or care about their banking needs and aren’t particularly good at charging fair fees or providing accurate information. They say that the banking system is getting worse. Bankers, in turn, say that banking customers don’t understand or appreciate what it takes to run a bank. But they say they think customers notice and appreciate the improvements they’ve made since last year.

None of this should come as a surprise to anyone. The alarming thing in the survey is the part about what banks are planning to do.

Most banks say they plan to raise account maintenance fees, or introduce them where they didn’t exist before. These new fees will hit mostly in 2011. Banks say they will avoid losing customers by focusing on improving the customer experience and building “deeper” customer relationships. But they can do this, of course, only if the customers agree, and the changes the customers say they want are almost the opposite.

If you are old enough to remember the office supply stores of the 1980s, you have some idea of how big the change in banking could be. In the 1980s, the number of office supply stores was huge. There were almost as many office supply stores then as there are bank branches now. Shopping in these stores was uniformly treacherous. Products were hard to find and often weren’t marked with prices, or if they were, those weren’t the real prices. That’s because the business model of the stores depended on charging different customers different prices. It could take an hour in one of these stores to buy a box of pens and a pack of 100 sheets of copy paper — and for that, you would spend over $20 if you weren’t a high-volume customer. The office-supply stores justified their high prices with the thought that office supplies was a labor-intensive, hands-on business. And it was. Back then, it was almost like doing business with a bank.

Then Staples and the other modern office supply stores came along. Staples charged less than half as much for everyday supplies, and the prices were publicly displayed, right there on the shelf tags. It was easy to find products because everything was organized into departments and displayed in plain sight, with nothing hidden in the back room. You could load up your shopping cart with whatever supplies you needed. Within 3 years, 100,000 old-style office supply stores had closed their doors.

Banks say they need new fees to cover the cost of operating the bank. Customers say banks take too much money already for the transaction processing they do. Guess what? In this case, the customers are right. The bankers are wrong.

In surveys, the largest group of bank executives said their top priority was either to improve the customer experience or expand the customer relationship. Virtually none said that cutting operating costs and streamlining operations was their top priority. But it should be. Customers want banking to be simple and inexpensive, and that is possible only if banks stop spending so much.

The banking industry has locked itself into a model of operations that, between the branch offices and the back offices, costs probably 8 times what it could cost. Banks cost so much to operate that one bank earlier this year failed apparently just from paying full price for its key operating equipment. Banking technology has remained expensive, even as the costs of technology everywhere else have declined, because:

Banking is a very conservative business, reluctant to try new things even if it can save a fortune.

The current setup maximizes the banks’ opportunities to upsell their customers — to sell more expensive services than what the customers thought they wanted.

The new wave of account maintenance fees are essentially the banks’ way of telling customers, “You need to cover what it costs us to sell you something more expensive.” The customers, naturally, see things differently.

When banking executives say their top priority is to improve and expand the customer experience, they’re really talking about new ways to charge some customers more than others. To trick more customers into getting more expensive services than they need. And in general, to become more like the office-supply store of the 1980s than they are already.

But what most banking customers really want is for banking transactions to be simpler, less expensive, and most of all, quicker than ever.

The banking market, then, is wide open for a new entrant to walk away with most of the banking customers, much as Staples came to dominate the office-supply business with no resistance at all from its old-style competitors.

This could be a Silicon Valley startup that naively believes banking transactions are no more complicated than status updates. It could be a Wall Street venture that imagines that banking transactions can be as quick and simple as stock transactions. Or, it could be an existing bank whose executives stubbornly refuse to impose new fees, and are willing to try anything to cut operating costs instead.

People do not move their bank accounts lightly, but the kind of monthly fees the larger banks are talking about, typically around $15, are large enough to force the average customer to wake up and look around. People will naturally gravitate toward the low-cost, low-fee banks. And since modern network-computing technology is highly scalable, the new banks will be prepared to handle an influx of tens of millions of additional customers.

And the old banks, the ones that think they can collect all the revenue they need to cover their losses just by raising fees and upselling their customers more often?

They’re screwed.

One of the former office supply stores in my local area is now a Starbucks. Another turned into a pizza restaurant. There is no reason for anyone to stop to wonder what was there before.

Tonight’s bank failures were concentrated in areas we had already heard from recently. The one billion-dollar bank among them was Hillcrest Bank. It had $1.5 billion in deposits in 41 locations in Kansas, Missouri, and three other states.

A Boston-based private equity group is setting up a new bank to take over the deposits of Hillcrest Bank. The new bank will keep the Hillcrest Bank name for now, and will also be buying the assets of the failed bank. The bank holding company, NBH, will eventually sell stock to the public. In an announcement, it said it plans to combine Hillcrest Bank with Bank Midwest, also based in the Kansas City area. Its acquisition of that bank was recently announced, but won’t go forward until regulators approve it. The combination would be the fourth largest bank in the Kansas City area.

The failure of Hillcrest Bank was the result of real estate losses nationwide. The strategy of geographical diversification was supposed to protect it, like the investors in mortgage-backed securities, from losses. But when the real estate market declined nationally, Hillcrest Bank faced stiff losses in both its Kansas City and national portfolios. Its Florida affiliate had failed a year ago, as Florida real estate declined sooner than the rest of the country.

In Arizona, First Arizona Savings, which had seven branches in five Arizona towns, failed tonight. It had been operating since 1988. It had $200 million in deposits, of which the FDIC estimates 99 percent was within the deposit insurance limits. The FDIC was unable to find a buyer for the failed bank, so it will mail checks to depositors beginning Monday.

Five small banks, with deposits totaling $472 million, also failed:

First Suburban National Bank, with four locations in Illinois. Seaway Bank and Trust Company is acquiring the deposits and assets.

The First National Bank of Barnesville, with two locations in Georgia. United Bank is acquiring the deposits and assets.

Progress Bank of Florida, with two locations. Local competitor Bay Cities Bank is acquiring the deposits and assets.

First Bank of Jacksonville, with two locations in Florida. Ameris Bank is acquiring the deposits and assets.

The Gordon Bank, based in Gordon, Georgia. Morris Bank is acquiring the deposits and about half of the assets.

A credit union failed this week. Phil-Pet Federal Credit Union of Pampa, Texas, had 765 members but less than $4 million in assets when the NCUA put it into liquidation on Monday. Share accounts were transferred across town to Pantex Federal Credit Union.

Thursday, October 21, 2010

Have you ever stopped to consider what makes a logo look “corporate”? The bold strokes, smooth, sweeping curves, and abstracted forms that have no connection to anything are meant to say, “Please think of my business as the ultimate in big and important.” Other aspects of the corporate style of presentation, from the perfectly straight lines everywhere to the impossibly clean carpets, are meant to reinforce the idea of transcendence. It is as if the corporation is the new god, ultimately unable to be reduced to, or limited by, anything in the physical plane of existence. Perhaps that’s what corporate executives want to believe, and perhaps that’s why they keep commissioning new corporate-style logos.

It turns out there is a problem with this trend. Well, there is a theological problem, of course, but more than that, there is a marketing problem. Consumers, it seems, are starting to see the “corporate” brand as having a meaning of its own. “Corporate” is like someone who never chose a major field of study in college, so it lacks credibility when it comes to any kind of specialized knowledge. There is something vague and noncommittal about a logo that is just as much at home on a soda bottle as it is on a sewer pipe.

This matters more with some products than with others. When consumers are looking for a product that has important physical or emotional attributes, they are more likely to trust a logo that suggests something physical.

And so, now we are seeing scenarios as unlikely as big corporations hiring teenagers with nylon-tip pens to design logos for environmentally friendly food products. It turns out that just putting the words “Environmentally Friendly” under a typical abstract-looking corporate logo has about the same credibility as, well, the BP logo. But if you hire a artist to spend days creating a logo and other supporting graphics using actual physical materials (or a computer simulation of them), you can create a brand that says, “we pay attention to the work we’re doing,” and the message becomes more believable, even though it’s still the same big corporation in the fine print on the back of the wrapper.

The recent story of the Gap logo failure is easier to understand when you see it in this context. The Gap’s parent company spent most of this year researching the proposed new Gap logo. In tests, everyone agreed it was more modern and more commercial than the old logo. But it was too corporate, too abstract. It offered no hint of what business “Gap” was in. Nor did anything in it hint at the ideals of comfort, freedom, and detail that the Gap brand has traditionally represented. Just the opposite — it looked as if it might have been “designed” by someone taking a photograph of a store name in a mall directory.

After a flood of complaints, The Gap abandoned its “corporate” logo after just a week. It’s gone to a subtly streamlined version of the old logo, the one that has a gap between each two letters. That gap is a physical detail, it specifically fits the name, and it’s possible to imagine a meaning for it, so it isn’t the transcendent logo the company was looking for, but the physical details suggest the kind of specialized knowledge that the transcendent approach denies.

There is another reason why corporate branding will be declining in the decade ahead. It is no longer so distinctive. A person with no design training and an ordinary computer can create new graphics with a corporate look by trial and error in less than a day. I designed the logo parody shown here in about 20 minutes. Teenagers can now create a corporate look for their startup businesses, and after a few years of this, the actual big corporations will have to look for a new way to stand out.

Wednesday, October 20, 2010

Many of the same lending practices that fueled the subprime part of the mortgage crisis are being seen now in college loans, and colleges and their affiliated lenders are being forced to make some of the same adjustments that mortgage lenders had to make.

Some colleges, for example, have had to stop paying bonuses and incentives to admissions officers based on the number of new students they recruited. One college has introduced the idea of a 3-week trial semester, without financial aid, designed to eliminate students who wouldn’t be able to perform at a college level. Millions of students who find out they aren’t ready to attempt college work are stuck with student loans that they are unable to repay, similar to the way that certain kinds of subprime mortgage borrowers were often unable to repay their home mortgages. This kind of compensation practice led to many bank failures, but colleges won’t suffer financially from overly aggressive recruiting practices because colleges don’t take the losses when a student can’t complete the curriculum or repay the loan.

One big difference between mortgage loans and college loans is that college loans are targeted largely at 17- and 18-year-olds who, by definition, lack the kind of advanced education that could help them detect scams and fraud on the part of the lenders. But like mortgage loans, college loans are backed up by cultural ideals: “get a degree” has the same ring of cultural approval as “own a home of your own.”

Students who earn a degree may find themselves with loans too large to ever pay off, but the greater burden falls on students who don’t finish college, or who are expelled by their colleges, either for misconduct or poor performance. They have the debt but not the employability of a college graduate, and often find themselves unable to pay for housing for ten years or longer as they pay off their loans.

It’s a trap that colleges may be eager to put their customers into, as colleges depend on student loans for most of their revenue. Of course, any college would rather see its students graduate and succeed in life, but they may make nearly as much money from the students who fail.

College loans don’t involve trillions of dollars, but they are big business, and there is a very real possibility that college lenders that emphasize loans to unqualified borrowers could fail, and that for-profit colleges could see a substantial decline in attendance and revenue as regulators crack down on the worst student lending abuses.

Tuesday, October 19, 2010

The recent court decision to allow a constitutional challenge to the health reform bill is far more significant that a refusal by the court to dismiss the case. I spent some time reading the court’s ruling (skipping over only the Medicare section) and largely being convinced by it. Based on this ruling, it will be hard for the mandatory coverage provision to survive the court challenge.

The focus of the case, subsequent to the ruling, is a question of whether Congress has the power to assess a penalty for failure to purchase a commercial product. The court ruled that the penalty for not carrying health insurance for oneself or one’s employees subsequent to 2014 is a penalty, and not a tax, as the law itself states. The most compelling part of this argument is that some earlier drafts of the bill described the penalty as a tax, but the word tax was taken out and the word penalty substituted in the bill that was ultimately passed. As Judge Roger Vincent wrote in his ruling, it is not within the prerogative of the courts to “conclude that Congress really meant to say one thing when it expressly said something else.”

This ruling is a setback for the White House, as it subsequently will have to persuade the court, and ultimately the Supreme Court, that the Commerce Clause of the U.S. Constitution gives Congress the power to direct everyone to buy a specific commercial product, the details of which are determined by private companies. Nothing like this has ever been legislated before. The court ruling quotes a 1994 Congressional Budget Office report: “A mandate requiring all individuals to purchase health insurance would be an unprecedented form of federal action. The government has never required people to buy any good or service as a condition of lawful residence in the United States.” In economic terms, the health coverage mandate is a tax, and the fact that it may be paid to a private company merely means that the government has granted those companies quasi-governmental powers. In legal terms, though, it is not a tax, though this brings up the troubling question of what it actually is.

It now falls to the lawyers of the Justice Department to persuade the court that the Commerce Clause permits Congress to order everyone in the country to participate in a particular style of commerce. This will not be easily done. The Commerce Clause gives Congress the authority “To regulate Commerce,” but it is quite a stretch to show that this includes the authority to order everyone to participate while granting so much discretion and monopoly power to, and exercising so little control over, the companies they are required to patronize.

Ultimately, I believe the individual coverage requirement will be overturned, but the employer coverage mandate may not be. It may take all the time between now and 2014 for the courts to come to this decision. If the courts do strike down the individual coverage mandate, it doesn’t mean the rest of the health care bill will be overturned. Courts do overturn whole laws at times, but the mandatory coverage requirement is so easily separated from the rest of the law that it will be hard for the court to find a reason to strike down any other part of it.

This will, of course, undercut the careful compromise that Congress had worked out with the health care industry, but it won’t ruin it. No one ever imagined that the health care reform would provide coverage for everyone, and if it turns out that only 65 percent of people are covered, instead of 70 percent, that is just an incremental difference in what is fundamentally a messy situation.

Economically speaking, adding the individual health care mandate while enhancing the monopoly powers of the insurance companies makes no sense. We end up covering 70 percent of the country, or only 65 percent, at a cost significantly greater than the cost of covering 100 percent of the people. We transfer government powers, powers that ought to be kept within a system of formal accountability, to private companies that have no obligation to act in the public interest. The employer health care mandate is, in some ways, worse, as it gives employers a strong incentive to minimize the number of people they employ within the country. With all these problems and countless others I have not mentioned here, having the individual mandate overturned in court will not add significantly to the health care mess that Congress, to date, has mostly failed to address.

Monday, October 18, 2010

Something funny is going on in the U.S. labor market. It’s obvious that there are millions of high-skill workers who are looking for jobs, desperately in many cases, yet many employers complain that they can’t find qualified workers. I’ve come across anecdotal evidence that may explain some of this. And it’s not about a mismatch of skills, with workers having the wrong skills for the work that needs to be done.

It starts with employers combining jobs. An example from a recent news story was a factory that decided to combine assembly, computer programming, and quality control work. This makes some sense for the operations of a shrinking factory, but it just combined the job requirements of what used to be three jobs. Then it found that no job-seeker in the whole country had the years of experience it was looking for in all three of these specialties.

I pored through job listings and found example after example of the same thing. Employers want software engineers who have network management skills and are fluent in multiple European languages. Epidemiologists who can double as statisticians. Restaurant managers who can do bartending and accounting. But they aren’t interested in paying the premium salaries that these rare combinations of skills would command. And even if they were, so few people possess these specific attributes that there is no assurance of hiring any of them.

Employers may not understand the scarcity of combinations. This is a concept from advanced mathematics, but if you have never studied probability or related fields, it can come as a surprise. To take a simple example: A million people use the first name Rick. Tens of thousands have the last name Aster. Therefore, there’s nothing strange about the name Rick Aster. But the fact that the name is perfectly ordinary doesn’t mean it occurs frequently. There are only a few people with the name Rick Aster.

Here is another example. There are about 5,000 active rock musicians in my local area, so maybe there are 1,000 bassists. About half of them sing, and about 1 in 50 also play violin, so there might be 10 rock bassists who sing and play violin. If I want to recruit one of these approximately 10 musicians, I have to have a very advanced strategy just to find out who they are.

Obviously, that’s not what employers are doing with their combination job descriptions. They are passively waiting for responses, and being disappointed when applicants are only partly qualified. In the current slack job market, employers have become even more passive than they were before.

Sometimes, employers are just advertising for the specific combination of skills that the last worker had. I’ve seen this in my own career, when I was the temporary worker, and the employer advertised for a permanent worker to replace me. The job listing asked for someone who had my exact skills: advanced SAS programming, customer segmentation experience, financial background, and so on, line after line for most of a page. Obviously, that didn’t work. When they thought a little further about what they actually needed, they focused the job description better and eventually hired someone.

If you need a worker, there is always a way. The most obvious strategy is job training. If you need someone to do bartending who is fluent in multiple European languages, the obvious approach is to hire the person who is has approximately the right language skills and teach them how to work a bar.

What makes this year so different is that many employers aren’t looking for any of these alternatives. If they can’t find just the right person at the exact salary that’s in the budget, they don’t want to take any chances. Instead, they’ll leave the position vacant. They say there is a mismatch of skills, but it isn’t really that. It is a sign of businesses running scared. And if this many businesses are this scared, that is a problem in itself.

Saturday, October 16, 2010

After a decade of hype, General Motors is poised to start taking orders for the Volt, but does the Volt really exist? And obviously, the Volt does not yet exist in a mass-production sense, so the question is, can General Motors really deliver it in the near future, in quantity before the end of the year, as it has promised? Or, could it be nothing more than a publicity stunt to support the company’s stock offering, with the actual car to follow months later?

It sounds like a crazy question until you consider what’s at stake for the company. If Volts start to trickle out of the factory only in March and don’t ship in volume until July, perhaps with specs that have changed yet again, then it has lost some of its revenue opportunity, and thousands of customers might be disappointed or disillusioned. But if its stock offering fails, then there is no more General Motors. How much would you be willing to say about what you would be able to deliver if you knew the future of your job depended on what you said?

And there are several more reasons to wonder about the Volt. There is the secretive nature of the car’s release (in spite of the massive hype surrounding the name), with no one quite sure they have seen or reviewed the actual car. That’s the kind of uncertainty you expect for a car that will be shipping in four to eight months, not one that goes on the market in a few weeks. There are the many changes in specs, radically different this month from what the company was talking about last month, which was already a complete change in style from the concept cars seen at auto shows for longer than some of us have been alive. The scarcity of photos to accompany reviews also suggests that the final appearance is still being worked out, which in turn means that engineers could not have gone far in designing the assembly process. And then there is the extraordinary divergence of impression among the reviewers so far: the natural result of looking at a first-of-its-kind product, or are different reviewers looking at and driving very different cars?

There is no question that General Motors is committed to the idea of the Volt, but the revelation days ago that the Volt will not be an electric vehicle after all, but a plug-in hybrid, makes you wonder how fixed and stable the company’s objective is. If a detail as essential as the vehicle’s power source could change, then anything at all could change, and we are left taking a wait-and-see approach to the entire initiative.

Friday, October 15, 2010

I am hearing and reading stories that suggest that banks are not following the new credit card rules, particularly as they refer to the timely application of payments. One of the “gotcha” tricks of credit card banks is to hold check payments for several days before processing them, in order to generate more late fees. This is now specifically illegal, but banks are still doing it.

The White House earlier this week considered the merits of a nationwide mortgage moratorium, only to conclude that such an action was not needed and might be counterproductive.

Some banks knew they were in trouble with foreclosure error even before the current scandal broke. JPMorgan, for example, set aside about a third of its quarterly profit to cover future legal and administrative costs and compensation, and spent much of its earnings call defending its foreclosure process.

Three Countrywide executives reached a settlement with the SEC today. Angelo Mozilo will pay $22.5 million as a penalty along with a forfeiture of twice that amount. The latter sum, though, will be paid by Bank of America, which bought Countrywide after its collapse. David Sambol and Eric Sieracki also settled, and will pay penalties of less than $1 million. With the settlement, a jury trial that would have started on Tuesday will not go forward.

Banks failed tonight in Missouri and the neighboring state of Kansas. The banks’ deposits and assets were transferred to nearby banks. The largest was Premier Bank, with 8 locations in Missouri and one in Grapevine, Texas, and $1 billion in deposits. Premier Bank owned more than $100 million in foreclosed real estate projects. It had been losing money for some time, and its remaining equity had vanished earlier this year. The successor is Providence Bank, which is purchasing 56 percent of the failed bank’s assets.

Also closed tonight, Security Savings Bank had nine branches in eastern Kansas and $397 million in deposits. It had missed an August 31 deadline to raise capital. The successor is Simmons First National Bank.

The other Missouri bank failure tonight was WestBridge Bank and Trust, with its office in Chesterfield, Missouri. It had $72 million in deposits. It had been in business just since 2006, and had spent a significant part of its initial $12 million in capital to build the building where it operated. It reported a loss of $3 million in 2008, and the losses continued. A deal to sell the bank to investors for less than $1 million was approved by stockholders last summer, but fell through after the would-be buyers reviewed the bank’s assets. The successor is Illinois-based Midland States Bank.

Thursday, October 14, 2010

If there is anyone who still imagines that General Motors Company has set itself up to succeed, they need to see this envelope.

It arrived in Tuesday’s mail, ironically while I was out on a car-shopping trip. It’s an offer for the newly re-launched GM Card. Yes, believe it or not, General Motors and its banking partner are still promoting the GM Card as the way to buy a car, and they are still talking about “5%” as if that were the discount you could hope to get on the car you buy.

This heavily-promoted credit card rebate program was supposed to boost sales, by encouraging credit users to buy General Motors cars. Instead, sales declined. Sales declined among cardholders — there is a strong incentive to postpone the purchase of a General Motors car for another year, in the hope of accumulating a larger rebate allowance. Sales also declined among non-cardholders — the message is that you may pay 5 percent extra to buy a General Motors car outside the rebate program. If that misinterpretation of the rebate program has stuck in consumers’ minds, it is because it is basically true — comparable cars from other manufacturers do cost about 5 percent less.

Now, of course, many consumers have sworn to stop using credit cards and to get away from the financial lifestyle of excess that credit cards have come to represent. The GM Card serves to suggest to people, or perhaps remind them, that General Motors vehicles and General Motors Company itself are part of this pattern of financial excess.

If General Motors thinks the GM Card works, it could be the result of what Nassim Nicholas Taleb calls the silence of the graveyard. In any sales promotion, dealers hear from the customers who like or tolerate the promotion. They never hear from the potential customers who are offended or scared away — surely a much larger number in the case of the GM Card. Focusing only on the successes and disregarding the failures, it is easy to imagine a success rate that has no connection with what is occurring in reality.

The GM Card is out of touch with the spirit of the times and with the financial challenges that General Motors faces. Unfortunately, that is a pattern found in most of the news coming out of General Motors. It has been backing out of deals it desperately needs, serially postponing and downsizing a planned stock offering, and now, falsely promoting its plug-in hybrid Volt as an electric vehicle (check for the gas cap before you buy). It’s a picture of a company buying time rather than finding a way forward.

Wednesday, October 13, 2010

My car is nearing the end of its life. Realistically, I can’t expect it to run more than about another 80,000 miles, or 6 years.

The fact that I can make that assessment of a car that I’ve driven for 12 years and 125,000 miles, after it was already driven 35,000 miles by its original owner, is a measure of how much the auto industry is changing. After all, a quarter of a century ago, 6 years, 80,000 miles was about all the average car buyer really expected of a new car.

Yesterday, I was the driver on a car-shopping expedition. The objective was to replace a car that had conked out after 15 years and 206,000 miles. The replacement turned out to be a slightly newer version of the same thing, around the middle of its life at 91,000 miles. We found out quickly, with an online search, that prices of used cars have fallen compared to two years ago. Even the practical fuel-efficient commuter cars seemed to be less expensive than they were toward the end of the boom, but other categories seemed to be down by about 15 percent. Sales of new cars may have fallen by a third, but it isn’t because shoppers are buying all the used cars out there. The picture at car dealers confirmed this. We didn’t see any other customers all day. New and used cars were spread out across the front of the lot, in a space that previously might not have held the entire new car inventory. One car had been forgotten for long enough that it had to be jump-started for the test drive.

The auto industry’s sales numbers, which showed signs of optimism last winter, now seem to have fallen back to the previous downward trend. September new car sales were up only when compared to the post-Clunkers lull of September 2009. There was nevertheless an air of optimism around the car dealers we visited. The boom years of fuel-burning cars may not be coming back any time soon, but there is still work to be done.

The repair department is the one part of the auto industry that hasn’t seen a decline. People are driving almost as much as ever, so the cars still need tires, oil changes, and replacement parts. The transition from the prior five-year replacement cycle for cars to a 20-year cycle (or wherever things settle out in the end) couldn’t come without a decline in sales, but that doesn’t mean that cars are going away.

Monday, October 11, 2010

I wrote recently about the need for money laundering for corporate political spending, so that corporations can buy elections in secret. I wasn’t specifically thinking of the U.S. Chamber of Commerce when I wrote that, but Think Progress says that the U.S. Chamber of Commerce may have become the largest political money laundering operation — and that much of its money is coming from overseas.

The U.S. Chamber of Commerce has morphed in recent years from a pro-business lobbying organization to essentially a political action committee aligned with the cultural-overthrow elements of the Republican Party. Its campaign to abolish trade unions continues, but mostly, it supports candidates who want to ban abortion and hip-hop and drive gays out of the workplace. At the same time, it has greatly expanded its fund-raising overseas, news that comes as a surprise to me, but which the organization itself has apparently confirmed. The U.S. Chamber of Commerce says that none of the foreign money goes to its U.S. political operations, but it is hard to see where else the U.S. Chamber of Commerce might be spending the money, now that it is not much more than a Republican political organization.

Think Progress worries that the U.S. Chamber of Commerce’s political money-laundering might be illegal, but I believe it is misreading this year’s Supreme Court decision, which throws the doors open for corporate spending on U.S. politics. Hardly any corporations belong purely to one country, so the decision, in not specifically separating corporations with mostly U.S. operations from ones operating elsewhere, or even owned by foreign governments, is intended to elevate all corporations to the same privilege of political speech enjoyed by U.S. residents or citizens. This means that everything the U.S. Chamber of Commerce and similar organizations are doing is legal under current law. The one possible omission could be if a political money-laundering organization has neglected to register as a foreign lobbyist, but that is a formality easily completed with a single sheet of paper.

If multinational corporations and foreign governments want to try to buy this year’s elections, they will not be working mainly through a high-profile organization such as the U.S. Chamber of Commerce, which by all accounts is spending less than $1 billion on advertisements for Republican candidates this year. The more likely channel for political money-laundering will be through little-known, fly-by-night organizations run by freelance political operatives and advertising executives. These organizations have no public presence (aside from their advertising budgets) and may vacate their leased offices the day after the election. There must be hundreds of these political front organizations, each capable of laundering corporate political money in the billions.

Multinational corporations spend billions per day on advertising to influence decisions by U.S. consumers. Now that they are free to spend unlimited amounts on political issues, a small part of this flood of money is being directed toward the decisions that voters make — and next month’s elections will be affected in ways that no one could predict at this point.

Sunday, October 10, 2010

Today is October 10, 2010, a date that can be written as 10/10/10. It also happens to be the time of another kind of alignment, with Jupiter about as close to Earth as it gets. If you look for a tiny full moon in the sky at night, especially late at night, that’s Jupiter. That is, you can see Jupiter rising around sunset, high in the sky around midnight, and setting around sunrise. Later this week, you’ll be able to see Jupiter near the full moon. This will mean that Sun, Earth, Moon, and Jupiter are momentarily forming nearly a straight line. Uranus is part of this line too, near Jupiter in the sky, though you may need the help of an astronomer to show you where it is.

Saturday, October 9, 2010

In the Fear of Nothing blog, I take a new look at the cost of owning things, focusing specifically on jeans and the recent Levi’s study about the life cycle costs of jeans. The bottom line: just the cost of laundering jeans is typically greater than the cost of manufacturing them. You can cut costs, and cut the carbon impact, by washing jeans only when they’re dirty. You save time, spend less on energy and water, and maximize the useful life of the jeans.

Friday, October 8, 2010

What will happen to creditors, other than bank depositors, when the FDIC has to dismantle a collapsed bank holding company or other complex financial institution? According to Reuters, the FDIC will shortly propose rules for that situation. The rules will treat all creditors the same, with narrow exceptions that may apply for contractors who are actually involved in operating the banks, especially if the FDIC creates a bridge institution to continue operations for a short time. This means that the electric bill might get paid, but bondholders will not be paid in full, if at all. This is similar to the rules that govern bankruptcies. Unlike bankruptcy, however, bondholders cannot become owners of an insolvent institution in FDIC liquidation. Speculators often buy distressed bonds in the hope of gaining an ownership share in a corporation in bankruptcy, causing distortions in the bankruptcy process, but this won’t happen with an FDIC liquidation.

The problems of foreclosure error have led major banks to stop foreclosures temporarily. Today Bank of America became the first large bank to stop foreclosure sales in all 50 states. It had suspended sales of foreclosed houses in 23 states last week, and said today it uncovered enough potential for trouble in its review to extend that to the rest of the country.

There was a guilty plea this week from Charles Antonucci, who was president of The Park Avenue Bank in New York City, which failed in March. Antonucci pleaded guilty to TARP fraud. He was accused of using a loan from his own bank to invest in the bank, along with a complex scheme to disguise it as his own money in an attempt to qualify for TARP funds. This form of fraud is not as common as it was in the past, when it was frequently used as a mechanism to make a bank appear bigger than it actually was. The judge in the case ordered Antonucci to surrender the money in question, along with related assets.

Thursday, October 7, 2010

Foreclosures are a growing trend. One estimate I saw on television suggested that 1 in 5 U.S. houses would face foreclosure by 2012. Already in many areas, foreclosures provide about half of the houses that are sold. With so many foreclosures, it matters that they’re done well. It matters not just as a matter of public policy, but as a financial make-or-break issue for banks.

It makes sense, then, that several large banks have suspended foreclosures in one way or another while they reexamine their procedures. PNC Bank today joined this group, telling closing agents of an immediate 30-day suspension in the sale of foreclosed houses. PNC is the new home of National City, which collapsed from its mortgage loans two years ago.

The widespread consequences of errors in foreclosure actions have made the problem a political issue, with state attorney generals and members of Congress among the political figures calling for various forms of disclosure from the banks. Currently, most banks don’t even collect the foreclosure information that politicians are asking for, and I’m sure some banking executives today are asking, “Why don’t we collect this information?

Wednesday, October 6, 2010

Toys, toys, toys. Retail analysts are expecting toys to make a big comeback at retail this Christmas, after a year that saw a stable economy and relatively few major toy recalls. Toys “R” Us is so confident in the outlook for toys that it plans to open 600 extra stores for the Christmas shopping season. It can do that because there are so many vacant stores available for rent on short notice.

But if there is going to be a surge in spending, where will the money come from? Consumers’ financial pictures haven’t particularly improved since last year, and more layoffs are on the way this fall. I believe the answer will not be found at Toys “R” Us or other toy stores, but at dollar stores, especially Dollar Tree.

This is a trend that I imagine will cut across gift categories this Christmas. People who skipped gifts entirely last year will, in some cases, want to come back to that custom, but won’t want to put much time or money into it. In other words, instead of shopping for hours to find the ultimate gift, people will be looking to pick up something quick that looks like a gift.

This trend will drive traffic to online boutiques that can be easily found in search engines. There, shoppers can buy something distinctive in just a few minutes. For people who have to spend less, though, the dollar store is the quick answer.

I haven’t seen any sign that shoppers have more time on their hands than last year. The trend toward increasing time pressure will put more pressure on shopping malls, which are set up to keep people shopping for hours.

Tuesday, October 5, 2010

As I’ve been catching up with the world since my book release two weeks ago, I finally caught up with the story of the New Century Bank name change. New Century Bank, a small five-branch community bank based in Phoenixville, Pennsylvania, in my local area, with no particular history as far as the public was concerned, announced a name change April 26, taking on the name Customers 1st Bank.

The name change announcement came on a Monday morning following the Friday failure of a bank also called New Century Bank, but located in Chicago. The timing and wording of the announcement strongly suggest that New Century Bank executives wanted customers to imagine that it was the bank that had failed and been taken over that weekend. Later in court, however, executives stated that they had chosen the name change to distance their bank from the stories of bank failures. If this is true, however, they got the timing all wrong, and selected their new name incorrectly.

Among the problems with the name Customers 1st Bank was the fact that “Customer First” was a name a direct competitor was using for its consumer banking services. This was a smaller local bank, Alliance Bank. The public perception created by the name change was probably the thought that New Century Bank had failed and had been acquired in liquidation by Alliance Bank.

None of that had happened. New Century Bank, though it had not been profitable, had not failed, and it never had any association with Alliance Bank. The timing of New Century Bank’s name change, the weekend of the headlines about the New Century Bank failure, was a mistake, if the objective was to distance the bank from the bank failure story. It did the opposite — it put the bank in the middle of a bank failure story that had nothing to do with it. The selection of a new name already recognizable to local banking customers was also a mistake. The combined effect of these mistakes was to attach the impression of failure to a bank that previously had been seen as a startup.

Trademark issues aside, Customers 1st Bank is a surprising weak name from a marketing standpoint. “First” is, of course, one of the most common words in bank names, usually in the form “First National Bank of ____.” Thus, when you see the name “Customers 1st Bank,” you may translate it mentally to “1st National Bank of Customerville,” or something similarly artificial. The result is the impression of a bank every bit as contrived and tentative as New Century Bank actually is — and that’s not the impression that the bank wanted to make. The bank could have discovered all this by doing a routine marketing study, of course, but from court documents, there was no marketing research prior to the name-change decision, only a logo design and a few minutes of conference-room discussion.

The reason we know this is because Alliance Bank immediately took action to stop the name change. Alliance Bank sent a cease and desist letter to New Century Bank four days after the announcement, and New Century Bank compounded their previous errors by not responding. A court case followed almost as quickly as such things can happen, and on July 27, a judge issued a preliminary injunction ordering New Century Bank to stop using its new name and destroy all the marketing materials that contained the name.

I read the judge’s opinion and cannot find any fault with it. If New Century Bank had been permitted to continue using the name Customers 1st Bank, it would have been benefiting from several years of advertising and marketing efforts of its direct competitor, exactly the kind of thing that trademark laws are designed to prevent.

As an emergency measure, New Century Bank changed its name to Customers USA Bank, then to Customers Bank, essentially putting a red dot over the “1st” in the middle of the name. This too may be a mistake, as courts often order larger changes in trademarks than this after such a direct conflict between two trademarks. By changing the name only partially, New Century Bank may hope to save face in the eyes of its customers, but it could pay greater damages to Alliance Bank in the end. It also risks having to change its name a fourth time, but as we have since found out, that may happen anyway.

New Century Bank had planned to change its official name to Customers 1st Bank at a meeting in August, but that vote, obviously, never took place. And now, New Century Bank is planning a reorganization in order to form a bank holding company. This is a move that makes plenty of sense, now that it has acquired the deposits and assets of failed banks in two neighboring states. But the plan to form a holding company makes all the prior discussions essentially moot. The holding company will be a new company, so the bank can give it any name it chooses, but not, obviously, a name that is subject to a pending legal action.

This is a story that may end with another name change. The haphazard expansion of New Century Bank, with little attention to operations, is a pattern commonly associated in the past with a bank that is expecting to be bought out by a large regional bank after a few years. If that comes to pass, that would be the fifth name change for the bank’s customers to keep track of — obviously, not at all what the bank had in mind when it set this sequence of events in motion.

The current situation of needing to form a bank holding company need not have come as a surprise, given the bank’s ambitious business plan. For those who imagine that bank executives are careful strategic thinkers by nature, the New Century Bank name-change story is a cautionary tale that tells you that this may not always be the case.

Monday, October 4, 2010

How much of a problem is foreclosure fraud? It’s enough of a problem that several of the largest banks in the country have suspended foreclosures, enough of a problem that a large title insurance company is refusing to insure foreclosure sales by some of these banks. It’s serious enough that there is a realistic chance that some bank officers and executives could serve jail terms. It is bad enough that one real estate blogger says it would be a mistake for anyone to buy any house this year or next, until this is all sorted out. When someone on the inside is essentially calling for a moratorium on real estate transactions, it’s a good guess that the whole system has broken down.

I have to pause to explain the significance of title insurance in the foreclosure process — to connect the dots. A bank doesn’t foreclose on a house just so that it can take possession of the house. There is no gain to the bank unless it can then sell the house. For a bank to sell a house, there has to be a buyer, and most buyers will need financing — they’ll need a mortgage of their own. A mortgage can’t be issued without title insurance, however. The title insurance protects the bank that issues the new mortgage from prior mistakes in acquiring the real estate — mistakes such as the ones that occur in foreclosure fraud. Without title insurance, there is no new mortgage, and the property can’t be sold. If the property can’t be sold, there is nothing for the bank to gain by foreclosing.

So if the title insurance may not be available, a bank is almost forced to suspend its foreclosures, as several banks have announced in the last week. In a practical sense, the bank won’t be able to sell the foreclosed house. In theory, it could sell the house, but only to a cash customer — and the people who are financially strong enough to pay cash for a house tend also to be savvy enough to say, “I know this is a hurt property you’re selling, one that ordinary people aren’t able to bid on. I want it for a 30 percent discount.”

A bank that chose to continue its foreclosure express when the title insurance isn’t there can plan on taking huge losses on the process in addition to the risk of extraordinary legal expenses. It risks losing liquidity because of foreclosures, when the whole purpose of foreclosing, from the bank’s point of view is to gain liquidity. If done on a large enough scale, this course of action could put a bank of any size into insolvency.

The banks that sound cheerful and nonchalant in announcing a moratorium on foreclosures are not so sanguine after they go back inside and close the doors. Quite likely, they’re screaming for a fresh look at the accounting numbers that tell them whether they’re going to come out of this solvent or insolvent.

Some observers point out that the title insurance companies aren’t taking such a huge risk in insuring fraudulent foreclosures, because they can ultimately collect any losses from the foreclosing bank. This is mostly true. However, this works only for foreclosure errors that are discovered well before the bank in question fails. No company with the word “insurance” in its name wants to stake its future existence on the continued operation of any one bank, no matter how likely that seems now. Furthermore, a title insurance company faces potential administrative and legal costs of $30,000 or more in recovering from an erroneous foreclosure. That’s a huge sum of money when you look at how much money a title insurance company makes. It’s not a big deal if the rate of foreclosure errors is about 1 in 10,000. But if it is closer to 1 in 1,000, then a title insurance company could lose so much money it could require a financial rescue of its own.

So how high is the rate of foreclosure errors? I have previously guessed that it could be around 1 percent, or 1 in 100. That’s based on my knowledge of the accuracy of bank transaction processing. I don’t have any direct experience with foreclosures, but I have seen banks make mistakes in transactions of comparable complexity. For example, when banks issue loans, they occasionally fail to identify the borrower correctly. When banks waive service fees, they occasionally assign the waiver to the wrong account. When customers close accounts, the banks may mistakenly reopen the accounts the next day. And so on. Extrapolating what I’ve seen, I believe the rate of foreclosure errors would have to be significant.

There is anecdotal evidence to support this. David Dayen at Firedoglake shows a video from Rep. Alan Grayson that’s meant to emphasize how gross the errors can be.

He talks about a man who was foreclosed on when he didn’t have a mortgage and paid cash for the home; a home that had two foreclosure suits against it because both servicers claimed ownership of the title; a couple foreclosed on over a contested $75 late fee; and a story that sounded a lot like the ones from my HAMP series, only in the end the servicer used forged documents to claim ownership of the title.

Based on Grayson’s analysis, as many of 60 percent of foreclosures likely contain some degree of error — and Grayson has looked at this issue more closely than almost anyone else in Washington. Many of these foreclosures, obviously, would stand up with further revision. But anyone who imagines that the rate of erroneous foreclosures is insignificant, a small fraction of a percent, is whistling in the dark.

People dismiss the thought of foreclosure error in part because they imagine that the mortgage business is a nicely automated system, the kind that the banking system is known for, but the reality is otherwise. Mortgage financing is a system built on fax machines, spreadsheets, scribbled Post-It notes, e-mail, and phone calls. It’s easy for mistakes to occur, and when people are in a hurry, mistakes are guaranteed.

I don’t believe the ultimate rate of foreclosure error could be as high as 3 percent — but if it is, that would be enough to wipe out even the largest commercial banks and force the shutdown of Fannie Mae, not in the far distant future, but perhaps next year. So when you see a major bank trying to put a good face on the announcement that it has to take a second look at its foreclosure process — that’s a bank that knows its future is in doubt.

Sunday, October 3, 2010

Word of a budget deal came from Sacramento last night. The California budget process, though delayed longer than ever, seemed more matter-of-fact this time around. The big difference from the last two years, I think, was that no one was shocked at just how bad the budget was this time. Everyone was ready to negotiate over the kind of compromises that Central American governments were faced with in the 1980s. “No money for tires for the buses? Well, I guess we knew that.”

Based on the last two years, it’s fair to guess that the new California budget was put together mainly by eliminating lots of essentials, things that really are needed, probably not tires, but things like that that didn’t have anyone speaking up for them in the state capital.

It’s fitting that the new book Third World America, which warns of the declining position of ordinary people in the United States, was written by a Californian. Arianna Huffington writes, in her post introducing the book, about the disappearing middle class:

What became clear while writing the book is that the decline of the middle class was no accident. Middle-class America didn’t suddenly lose its mojo. It was the result of tricks and traps. Tricks in the ways we financed our homes. Traps in the ways credit-card companies used hidden fees and fine print and skyrocketing interest rates to get their hands on our money, driving more and more people into debt.

Here’s the bottom line: The fix is in.

Huffington calls for political reform but cautions against waiting for the system to start working again:

At the same time, this moment in history demands that we stop waiting on others — especially others living in Washington — to solve the problems and right the wrongs of our times.

Indeed, the new America won’t be built by people who sit around and wait for the government to fix itself. Anyone who takes that approach will just absorb one punch in the gut after another, like a California budget that’s 99 days late and has had the common sense stripped out of it. In the meantime, the more forward-looking Americans are working harder than ever, not just to keep up, but to make new things possible. Anyone who has a sense of history has to know that extraordinary things will come out of this effort.

Saturday, October 2, 2010

Late yesterday, Bank of America became the latest large mortgage lender to suspend foreclosures as it double-checks its paperwork. In about 23 states, mortgage lenders are required to double-check mortgage documents before they file foreclosure actions in court, but banks, one by one, are realizing they haven’t been doing so. In any state, banks may waste as much as $100,000 in administrative costs and legal bills for every erroneous foreclosure they file, so it saves money for them to verify each foreclosure before they file it. Instead, banks have been signing off on mortgage documents after just seconds of review, not the hour or two that would be required to make sure that the documents go together.

The result of this neglect: tens of thousands of court hours wasted. Probably about one percent of foreclosures have been filed against the wrong person, by the wrong bank, or for loans where a borrower was making payments. Banks have been bypassing the federal programs designed to prevent unnecessary foreclosures. A small number of foreclosures will surely be overturned on appeal; a larger number will have to be done over with new court filings.

Defense attorneys and community organizers have been warning about this problem for more than two years. Lenders are only looking at it now because major news organizations and state law enforcement officials have started to take the problem seriously.

Friday, October 1, 2010

Ireland is reshuffling its budget after committing to a €30 billion bailout of Anglo Irish bank. A recent downgrade is also adding to the country’s budget stress.

Most of the largest banks will meet the new capital requirements not by raising new capital, but by shrinking their loan portfolios — and they might shrink by more than that. As the role of banks changes, from the world’s biggest risk-takers to risk-averse continuing institutions, the opportunities available to them will shrink accordingly. Some analysts this week were speculating that the largest banks worldwide would have to cut their operations by a third or more, in addition to the roughly 5 percent cutbacks that have taken place already.

Some banks, however, will suspend dividends to raise capital, and UBS announced a three-year suspension of dividends this week. Switzerland-based UBS is affected more by the reclassification of assets than most banks. UBS will also have to reduce its high-risk loans from €400 billion to €300 billion over the same period, it said. It shouldn’t have any trouble doing so.

U.S. banking regulators have issued final rules, to go into effect January 1, that especially affect credit-card securitizations. The expanded safe-harbor provisions should ensure that no U.S. credit card issuer has to abruptly shut down on that date, but the total size of new credit card debt, incurred after January 1, will surely have to shrink under the new rules.

According to two measures released this week, the quality of credit has improved this year. This indicates that tighter lending rules put in place last year at virtually all banks have had the desired effect of reducing the banks’ exposure to loan losses.

The hope that an increase in short sales would lead to a decline in home foreclosures hasn’t materialized, at least not yet. Short sales have expanded, to be sure, but foreclosures are still increasing.

The first bank closing tonight was Wakulla Bank, closed by Florida banking regulators. The failed bank had $386 million in deposits and 12 locations in the Florida panhandle. It had been operating since 1974, expanding steadily until last year. Deposits have been transferred to Centennial Bank, which is also purchasing the assets.

Wakulla Bank’s liquidity faded as its capital was increasingly tied up in foreclosed real estate, including a golf course that it ended up operating.

On the West Coast, bank regulators in Washington closed Shoreline Bank, which had $100 million in deposits and three locations in Shoreline, Washington, a suburb north of Seattle. The deposits have been transferred to Los Angeles-based GBC International Bank (formerly Guaranty Bank of California), which is also buying 63 percent of the assets.

Shoreline Bank lost money on loans for local commercial real estate projects. It also took its share of losses in residential real estate. It had been in business for 11 years. In May, regulators ordered it to raise capital immediately, but it was unable to do so.